HOMES OUTSIDE THE UK OWNED THROUGH A COMPANY

Transcription

1 HOMES OUTSIDE THE UK OWNED THROUGH A COMPANY Memorandum submitted in October 2007 by the Tax Faculty of the Institute of Chartered Accountants in England and Wales in response to an invitation dated 17 July 2007 from HMRC to comment on draft legislation Contents Paragraph Introduction 1-2 Key point summary 3-6 Detailed comments 7-13 General comments Annex A - Who we are Annex B - The Tax Faculty s Ten Tenets for a Better Tax System ICAEW Tax Faculty, Chartered Accountants Hall, PO Box 433, Moorgate Place, London EC2P 2BJ T +44 (0) F +44 (0) E tdtf@icaew.com 1 of 8

2 HOMES OUTSIDE THE UK OWNED THROUGH A COMPANY INTRODUCTION 1. We welcome the opportunity to comment on the draft legislation dated 17 July 2007 published by HMRC at &_pagelabel=pagelibrary_consultationdocuments&propertytype=document&columns=1&id =HMCE_PROD1_ Details about the Institute of Chartered Accountants in England and Wales and the Tax Faculty are set out in Annex A. Our Ten Tenets for a Better Tax System which we use as a benchmark are summarised in Annex B. KEY POINT SUMMARY 3. Whilst we welcome the objectives, the draft legislation is unlikely to be sufficient to achieve all that is intended. 4. First, it limits the relief to properties owned directly by an individual through a single company whereas many properties abroad are held by a company the shares in which are held in a trust or by another company. 5. Secondly, it may miss the stated objectives owing to the approach adopted of leaving the property potentially within the benefit in kind charge and carving out a very limited exception. A better way to achieve what we assume was intended would be simply to disapply section 97(2), ITEPA 2003 in relation to living accommodation where, although a person is the director of a company, he is: unpaid, does not perform significant duties for the company, is entitled to occupy the property in the normal course of his domestic, family or personal relationships, and the property was acquired by the company either solely for the purpose of such occupation or primarily for that purpose but also with the purpose of being let when not required for such occupation. 6. Finally, as the intention is that no benefit in kind charge applies for as long as the property has been held, we would welcome confirmation that well-advised and honest taxpayers who have declared a benefit on their returns in the past will be able to claim a tax refund. GENERAL COMMENTS 7. We are disappointed with the draft clauses and suggest that they be rewritten. Budget Note BN50 said that Government would bring forward legislation which will ensure that individuals who have bought or will buy a home abroad, will not face benefit in kind tax charge for any private use of the property if purchased through a company. We do not think that the draft clauses achieve this in very many cases. They seem simply to enact the very temporary and limited measures that were 2 of 8

3 introduced at Budget time. We expected consultation on what form permanent measures should take and are disappointed that this has not happened. 8. The exclusion from the benefit in kind charge extends only to foreign properties owned by a company owned directly by individuals (excluding any holdings by trustees or partnerships) and the company must do nothing more than hold the property and do things which are incidental to its ownership. Whilst this is undoubtedly helpful to some people, there are a great many more whose properties are held by a company the shares in which are held in a trust or another company and these are unaffected by this legislation. 9. We therefore question whether the limitation to properties owned directly through a single company is sufficient to achieve the policy objective. Many properties in Spain and Portugal are typically owned by a local domestic company which itself is owned via an offshore company. The property is used in exactly the same way as a directlyowned property and the UK tax effects are the same for the shadow directors, but they appear to be outside the new relief. Was this deliberate, and if so, what is the justification for the different treatment? 10. The real problem is of course that there is no rational reason why a benefit in kind charge should arise where a holiday home is purchased through a company. This has accidentally got caught up in the benefit in kind legislation because of the deeming that a benefit provided by a person s employer must be treated as provided by reason of the employment. This deeming conflicts with facts in relation to holiday homes, where the person might be a director or shadow director by virtue of the fact that the company has acquired the property as his holiday home, not that the property is available for his use by virtue of the fact that he is a director or shadow director. 11. Accordingly we think it fundamentally wrong to enact legislation to leave the property within the scope of the benefit in kind rules and then carve out an exception. It would be far more logical to disapply section 97(2), ITEPA 2003 in relation to living accommodation where, although a person is the director of a company, he is unpaid, does not perform significant duties for the company, is entitled to occupy the property in the normal course of his domestic, family or personal relationships and the property was acquired by the company either solely for the purpose of such occupation or primarily for that purpose but also with the purpose of being let when not required for such occupation. We accept that there would be a need to exclude a company which is a subsidiary of another company and possibly one in which another company has interest. 12. The approach of leaving the property potentially within the charge and carving out a very limited exception is that the exception does not cover many of the circumstances that in fact exist we suspect because it is very difficult to identify all such circumstances unless and until they come to light. We accordingly think that the approach adopted will lead to many hard cases that create unfairness. 13. A point on retrospection is that the draft legislation, assuming the conditions are met, seems to exempt holiday homes from the ITEPA 2003 Part 3 Chapter 5 charge for as long as the property has been held, without qualification as to length of time. We 3 of 8

4 would welcome confirmation that well-advised and honest taxpayers who have declared a benefit on their returns in the past will be able to claim a refund. Error or mistake claims are presumably precluded because the tax will have been paid in accordance with a current practice or understanding of the law, underpinned by the judgment in R v Allen. DETAILED COMMENTS 14. Our comments on the draft clauses are as follows A(1)(a) Why should it be necessary for all of the company s shares to be owned by individuals? Where a property is bought for use by the family it is surely not unreasonable for the shares in the company that owns it to be owned by a family settlement or for the company to be owned jointly by two generations of the family and the shares owned by infant children to be held via a family settlement. No one in their right mind would advise that shares in the company should be held direct by an infant because of the difficulty that it would create in selling the company A(1)(b) We are unhappy with the expression the holding company as this has a well known meaning which is different to the meaning in the section. This is a recipe for confusion. Why not simply say, The company falls within subsection 2 below at all times after the relevant time? Indeed why not simply say the company has owned a relevant interest in the property at all times since it first owned such an interest and the conditions in subsection 2 below have been met throughout that period? A(2)(b) What is meant by main or only asset? Main normally means over fifty per cent. Is this the proposed test? If so, we have no problem with it. If not, it can create problems because sometimes in order to borrow at arm s length to acquire the property the lender requires the company to hold a certain amount of cash to partly secure the borrowing. Furthermore the company may be expected to have an overseas bank account out of which to pay the running expenses of the company and into which rents can be banked. The existence of such a bank account ought not to prevent the property being the main or only asset of the company A(2)(c) What is meant by incidental activities? If a company acquires a property for use by the family and instructs a local estate agent to try to let it out at times when the family is not using the property, that letting seems to us to be incidental. Conversely if the family acquires the property with the intention of using it at Christmas, Easter and for six weeks during the summer, and asks the local agent to try to let the property during the remainder of the year, we very much doubt that such letting is incidental. If the property is situated in a location where the prime letting season is, say, June to September and the family ask a local estate agent to try to let it during that period and undertakes that the family will not itself use it during that time, we also doubt that the letting is incidental to the ownership. 19. As this is a relief that in reality only applies to those who are badly advised as a well advised person will not be a director of the company and is likely to take precautions to ensure that he is not a shadow director either it seems wholly wrong to use vague expressions so that a lay taxpayer is likely to have difficulty in interpreting the rules 4 of 8

5 A(3) What is so wicked about someone buying an overseas property jointly with a friend or neighbour so that his company only has a half interest in the property and accordingly the right to possession is jointly with the similar right of the other joint owner? 21. Also what is wrong with an offshore company acquiring an overseas timeshare interest? After all, the reason that an individual has to hold the interest in the company may well be to avoid overseas enforced inheritance rules and an individual will be equally anxious to avoid these if he buys a timeshare as if he buys a villa A(3) The relevant time ought not to include any time before D first owned an interest in the company. It is not uncommon for a person to acquire a holiday home by means of acquiring an existing company which owns it. Why should he be denied relief because of something that a previous owner may have done, particularly where that previous owner has never been resident or domiciled in the UK and therefore cannot be expected to have any knowledge of UK tax? 23. We also think that the relevant time ought not to include any time before say 6 April 2009 so as to allow individuals who do not meet the very restrictive tests of the section a little time in which to rearrange their affairs in order to come within its terms. For example, if 10% of the shares are held by somebody other than an individual, D ought to be able to purchase those shares so as to himself come within section 100A for the future, rather than having to set up a new company with qualifying shareholdings and transfer the property to that new company, which might trigger potential tax charges B(2) If an individual owns his holiday home in France through a French company that also operates the French branch of the individual s business and he decides that the company should sell the property to a parallel company that will meet the conditions of 100A(1)(a) but the price at which he transfers the property turns out to incorporate a small undervalue, why should the individual lose the relief entirely for all future years? After all he would have been taxed on that undervalue under section 13, TCGA 1992 and will also have suffered a benefit in kind charge under section 97, ITEPA 2003 on the undervalue. Again this impacts mainly on the self-advised as the well advised will include a price adjustment clause in the purchase agreement in case the price is challenged by either the local or UK tax authorities. If HMRC have a good reason for this restriction then it ought to be possible for the individual to escape the restriction for future years by making good the undervalue to the vendor company B(3)(a) We are unclear what this covers. Suppose for example that an individual has a Spanish building company, which refurbishes his Spanish villa, and the villa owning company pays the market rate for the work. It seems to us that expenditure in respect of the property has been incurred by the building company as it bought the building materials and paid its staff. However it seems irrational for the relief not to apply in such circumstances. 26. Similarly suppose one of the individual s accounts staff makes a mistake and accidentally draws a cheque on his UK company for work on the villa and the individual notices this a month later when he goes through the bank statements and immediately draws a cheque from the villa company to reimburse the trading company. It seems to us unreasonable that this should deny the individual the relief for all future years whilst the villa company owns the property 5 of 8

6 B(3)(b) It seems equally silly that if, in order to secure the property, an individual pays the deposit from his trading company and repays the deposit to it once he has secured long term finance that section 100B should not apply if he deposits before completion (because that is a time before the individual s villa company owns a relevant interest) but the restriction should apply forever more in the far more common case where the individual repays the deposit when he gets the long term mortgage (which clearly must be after completion as the lender wants the property as security). 28. Also, what is meant by an indirect borrowing? Suppose an individual borrows from the bankers to his trading company but they are only prepared to lend it to the individual if the trading company reduces its borrowing facility with the bank. Has the individual indirectly borrowed from his trading company? B(4) Do HMRC have something in mind? We find it hard to see how an individual can be trying to avoid tax if he meet all the other restrictive tests that the provision requires him to make. We would have thought that if someone was trying to avoid tax in factual terms his occupation of the property would not be by virtue of his relationship with the property owning company but rather by virtue of his employment or directorship with some other company. Section 100A would not take someone out of the benefit in kind rules where the benefit arises by virtue of employment with a different company. 30. We are particularly concerned about the position of a non-uk domiciled individual who comes to the UK and puts his previous home into an offshore company because he intends to let it out temporarily whilst he is living in the UK but also uses it for visits home and will resume occupation when he returns to the UK. Is the fact that the rents would have been taxed in the UK had he used a UK company regarded as avoidance of tax? 31. It appears that the intention of Ministers to remove a relatively tiny anomaly from the tax system is being thwarted by HMRC who are trying as hard as possible to severely restrict the number of cases in which that intention will be achieved by inventing fears of tax avoidance that are highly unlikely to arise in practice B(8) We assume that a company is connected with D only if section 839(6) applies, i.e. D and persons connected with D together control the company. This seems to follow from Schedule 1, ITEPA However as 100A(1)(a) will allow an individual to buy the holiday home in a company jointly owned with his neighbour (albeit that it will not allow them to have separate companies to hold their individual interests) it appears that in such circumstances the individual can ignore section 100B completely though his own wholly owned company lends funds to the propertyowning company to cover his share of expenditure. 33. We would welcome clarification of the logic behind this. PCB of 8

7 ANNEX A WHO WE ARE 1. The Institute of Chartered Accountants in England & Wales is a professional body representing some 128,000 members. The Institute operates under a Royal Charter with an obligation to act in the public interest. It is regulated by the Department of Trade and Industry through the Accountancy Foundation. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy (which includes taxation). 2. The Tax Faculty is the centre for excellence and an authoritative voice for the Institute on taxation matters. It is responsible for tax representations on behalf of the Institute as a whole and it also provides services to more than 11,000 Faculty members who pay an additional subscription. 3. Further information is available on the ICAEW Tax Faculty website at or telephone of 8

8 ANNEX B THE TAX FACULTY S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1. Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament. 2. Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. 3. Simple: the tax rules should aim to be simple, understandable and clear in their objectives. 4. Easy to collect and to calculate: a person s tax liability should be easy to calculate and straightforward and cheap to collect. 5. Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes. 6. Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear. 7. Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it. 8. Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed. 9. Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions. 10. Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK. These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99; see 8 of 8